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UK law makers and the judiciary should take note of new research that has claimed that a narrow reading of copyright law exceptions can result in an erosion of investment in new technologies, an expert has said.

Harvard Business School Professor Josh Lerner has published a new report (32-page/300KB PDF) that claims that venture capital investment in cloud computing companies in France and Germany has fallen in relation to elsewhere in the EU as a result of court judgments on copyright issues in those countries.

Technology law expert Luke Scanlon of Pinsent Masons, the law firm behind Out-Law.com, said that the report should be a warning to UK legislators and judges over the impact copyright law, and its reading, can have on the economy.

"This Harvard based research identifies serious economic consequences that both courts and legislators in the UK should not ignore," Scanlon said. "The purpose of copyright law is not to maximise revenues for rights holders. It is to set an appropriate boundary between on the one hand, enabling freedom to use ideas and information, and on the other, protecting expressions of ideas and information in order to encourage investment in creative and innovative works.

"Both the French and German courts have applied a general principle of interpretation which requires that copyright exceptions be construed narrowly. The problem is that these courts appear to have applied this principle rigidly without regard to its policy basis. Exceptions to copyright law are interpreted narrowly on the understanding that a high level of copyright protection will increase the supply, quality and diversity of creative and innovative works."

"Regard must be paid however to the impact which a narrow interpretation of a copyright exception will have on the progress of related innovative markets, such as in this case, the uptake of cloud computing solutions," Scanlon said.

"This is of particular relevance in the UK context as the government looks to widen its ability to define exceptions by statutory instrument and without full parliamentary scrutiny by means of the Enterprise and Regulatory Reform Bill," he added. "It is also relevant in the context of the Meltwater Group Supreme Court appeal, likely to be heard in 2013, regarding the issue of what is a temporary digital copy.

"The bottom line is that the extent to which copyright protection may be limited by an exception must be defined in a way that promotes innovation and economic growth within the region," the expert said.

Lerner's research, funded by the Computer & Communications Industry Association (CCIA), had looked into one ruling in France and "several" others in Germany relating to whether online technology firms were liable for copyright infringement by enabling copies of copyrighted TV programmes to be viewable by users without a licence. The CCIA is a lobby group made up of members from the internet and technology industries, including Google, Microsoft and Facebook.

French and German rulings

The French ruling in 2008 found that an online digital video recorder platform, Wizzgo, could not rely on two exceptions to copyright to justify making copies of copyrighted TV programmes in order that users could view them at a later date.

Wizzgo had argued that it only made "temporary and transient copies" of the programmes for private use by its users, and that both the transient nature of the copy and its private usage were exempt from infringing copyright, according to Lerner's report. However, the company's arguments were rejected and it was fined for infringing the rights of TV companies and content creators.

In Germany in 2009, the Federal Court of Justice ruled on a copyright issue relating to two companies that enable customers to select and store television content on servers from which they can download and stream the programmes.

In its ruling, the German court said that if the technology that companies use to facilitate such a service is not automatic, the firms would be liable for direct infringement of reproduction rights. If the technology was automatic, companies could still be liable for infringing TV companies' re-transmission rights to the public, the court had said, according to Lerner's report. Lerner said that, in practice, one firm that has not been found guilty of copyright infringement has nevertheless been unable to obtain a licence in order to legitimately retransmit TV content online.

The result of the rulings in France and Germany, Lerner said, was that venture capital investment in cloud computing had reduced in comparison to in other EU member states. "Uncertainty" also "likely exists" in Germany "regarding the viability of certain cloud computing business models," he added.

What it means for the UK

"Our findings suggest that decisions around copyright scope can have significant impacts on investment and innovation," Lerner said in his report. "We have tested a number of models and consistently find that the French and German rulings led to reduced investment in French and German cloud computing companies compared to the EU experience."

"Our results suggest that these rulings led to an average reduction in VC investment in French and German cloud computing firms of $4.6 and $2.8 million per quarter, respectively, implying a total decrease in French and German VC investment of $87 million after these rulings through the end of 2010," the US academic said.

"When paired with the findings of the enhanced effects of VC investment relative to corporate investment, this may be the equivalent of $269.7 million in traditional R&D investment," Lerner added.

Last week MPs debated the Enterprise and Regulatory Reform Bill in the House of Commons. The Bill includes proposals to change the Copyright, Designs and Patents Act (CDPA) so that the government could add or remove exceptions to copyright or add or remove exceptions to rights in performances through 'statutory instruments' containing new regulations.

At the time Luke Scanlon warned that too much haste over the drafting of new copyright laws could cause problems for businesses.

The government has proposed widening copyright exceptions to allow limited private copying, introducing an exemption for parody and pastiche and widening exceptions for library archivists and non-commercial researchers among other reforms.